STOCK BASED COMPENSATION

For a full description of the Company’s stock-based compensation programs, reference is made to Note 15 of the Company’s audited annual combined financial statements as of and for the year ended December 31, 2015 included within the Company’s Information Statement.

The Company had no stock-based compensation plans as of July 1, 2016; however certain employees of the Company participated in Parent's stock-based compensation plans, which provide for the grants of stock options, performance stock units (“PSUs”) and restricted stock units (“RSUs”) among other types of awards. The expense associated with the Company's employees who participated in the plans is allocated to the Company in the accompanying Combined Condensed Statements of Earnings.

In connection with the Separation, the Company adopted the 2016 Equity Incentive Plan (the “Equity Plan”) and outstanding equity awards of Danaher held by Fortive employees were converted into or replaced with awards of Fortive common stock under the Equity Plan based on the “concentration method,” and as adjusted to maintain the economic value before and after the distribution date using the relative fair market value of the Danaher and Fortive common stock. Other than replacement equity awards of Fortive issued in replacement of Danaher's performance-based RSUs and PSUs, the terms of the converted or replacement equity awards of Fortive (e.g., vesting date and expiration date) continued unchanged. Any performance-based RSU and PSU of Danaher held by Fortive employees with outstanding performance goals of Danaher were replaced in connection with the Separation with performance-based RSUs of Fortive with comparable value, and performance goals based on Fortive performance post the Separation.

In 2015, Parent introduced into its executive equity compensation program PSUs that vest based on the Parent’s total stockholder return ranking relative to the S&P 500 Index over a three-year performance period. As a result, effective in 2015 one-half of the annual equity awards granted to the Parent’s executive officers are granted as stock options, one-quarter are granted as RSUs and one-quarter are granted as PSUs. The PSUs were issued under the Parent’s 2007 Stock Incentive Plan.

The following summarizes the assumptions used in the Black-Scholes Merton option pricing model (“Black-Scholes”) to value options granted during the six months ended July 1, 2016:



Risk-free interest rate	1.3% to 1.6%
Weighted average volatility	24.6	%
Dividend yield	0.6	%
Expected years until exercise	5.5 - 8.0

The following summarizes the components of the Company’s stock-based compensation expense ($ in millions):



	Three Months Ended						Six Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
RSUs/PSUs:
Pretax compensation expense	$	7.2		$	4.4		$	14.2		$	10.2
Income tax benefit	(2.4		)	(1.6		)	(4.8		)	(3.4		)
RSU/PSU expense, net of income taxes	4.8			2.8			9.4			6.8
Stock options:
Pretax compensation expense	3.7			2.5			8.2			5.6
Income tax benefit	(1.3		)	(1.0		)	(2.8		)	(2.0		)
Stock option expense, net of income taxes	2.4			1.5			5.4			3.6
Total stock-based compensation:
Pretax compensation expense	10.9			6.9			22.4			15.8
Income tax benefit	(3.7		)	(2.6		)	(7.6		)	(5.4		)
Total stock-based compensation expense, net of income taxes	$	7.2		$	4.3		$	14.8		$	10.4

Stock-based compensation has been recognized as a component of selling, general and administrative expenses in the accompanying Combined Condensed Statements of Earnings. As of July 1, 2016, $54 million of total unrecognized compensation cost related to RSUs/PSUs is expected to be recognized over a weighted average period of approximately three years. As of July 1, 2016, $48 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of approximately three years. Future compensation amounts will be adjusted for any changes in estimated forfeitures.

The following summarizes option activity under Parent’s stock plans (in millions, except price per share and numbers of years):



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2015	5.8		$	56.00
Granted	1.4		87.99
Exercised	(1.3	)	39.85
Canceled/forfeited	(0.6	)	71.56
Outstanding as of July 1, 2016	5.3		$	66.65	7	$	188.4
Vested and expected to vest as of July 1, 2016 ^(a)	5.1		$	65.89	7	$	184.3
Vested as of July 1, 2016	2.1		$	46.75	4	$	114.5

^(a) The “expected to vest” options are the net unvested options that remain after applying the forfeiture rate assumption to total unvested options.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Parent’s closing stock price on the last trading day of the second quarter of 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on July 1, 2016. The amount of aggregate intrinsic value will change based on the price of Parent’s common stock and subsequent to the Separation, based on the price of the Company's common stock.

The aggregate intrinsic value of options exercised during the six months ended July 1, 2016 and July 3, 2015 was $71 million and $32 million, respectively. Exercise of options during the first six months of 2016 and 2015 resulted in cash receipts of $53 million and $23 million, respectively. The Company realized a tax benefit of $18 million and $25 million in the three and six months ended July 1, 2016, respectively, related to the exercise of employee stock options. The net income tax benefit in excess of the expense recorded for financial reporting purposes (the “excess tax benefit”) has been recorded as an increase to Net Parent investment and is reflected as a financing cash inflow in the accompanying Combined Condensed Statements of Cash Flows.

The following summarizes information on unvested RSU and PSU activity (in millions; except price per share):



	Number of RSUs/PSUs		Weighted Average Grant-Date Fair Value
Unvested as of December 31, 2015	1.1		$	72.24
Granted	0.4		86.31
Vested	(0.1	)	63.33
Forfeited	(0.2	)	74.55
Unvested as of July 1, 2016	1.2		$	77.01

The Company realized a tax benefit of $1 million and $5 million in the three and six months ended July 1, 2016, respectively, related to the vesting of RSUs. Any excess tax benefit attributable to RSUs has been recorded as an increase to Net Parent investment and reflected as a financing cash inflow in the accompanying Combined Condensed Statements of Cash Flows.

In connection with the exercise of certain stock options and the vesting of RSUs previously issued by the Parent, a number of shares of the Parent sufficient to fund statutory minimum tax withholding requirements has been withheld from the total shares issued or released to the award holder (though under the terms of the applicable plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the first six months of 2016, approximately 55 thousand shares of the Parent with an aggregate value of $5 million were withheld to satisfy the requirement. The withholding is treated as a reduction in Net Parent investment in the accompanying Combined Condensed Statement of Changes in Equity.